Oil & Natural Gas Corp (ONGC) has upped its ante on M&A, buying $5.4 billion in overseas E&P assets in the last year. With management targeting to more than double overseas output by FY18e, it may remain acquisitive.

These are unlikely to come cheap. ONGC risks overpaying but, even so, this may create only a 2-14% headwind for valuation multiples. With the stock at a 30% discount to long-term averages, we stay overweight. While it is unfair to pre-judge potential M&A, even if ONGC overpays by 50% on all future deals to ensure that it meet its FY18 target at all costs, it may dilute value by $4.5 billion or just 11% of its market cap. The de-rating on forward P/E may be lower at 7-8% from ONGC’s 9.2x average of the last decade.

Investors appear skeptical about higher gas and oil realisations for ONGC, but are also concerned about its recent aggression in buying overseas assets. Including capex, ONGC has now spent $22 billion on overseas assets by FY14e, with its E&P balance sheet turning net debt.

While ONGC’s earlier deals paid off, returns have now fallen with RoCE of just 6.5% in FY14e. This may stay subdued even as output rises 23% over FY14-16e to 1.91 lakh barrels of oil equivalent per day (boepd). Still, this will be short of ONGC’s target of c3.75 lakh boepd of overseas output by FY18, implying that it may continue to acquire. Indeed, with its focus now on larger discovered assets, deals are likely to be finely priced with the risk that ONGC overpays.